Why Are Some Workers Poor? the Mechanisms That Produce Working Poverty in a Comparative Perspective

REC -WP 12/2010 Working Papers on the Reconciliation of Work and Welfare in Europe Why Are Some Workers Poor? The Mechanisms that Produce Working Poverty in a Comparative Perspective Eric Crettaz Giuliano Bonoli Reconciling Work and Welfare in Europe A Network of Excellence of the European Commission’s Sixth Framework Programme Eric Crettaz and Giuliano Bonoli Why Are Some Workers Poor? The Mechanisms that Produce Working Poverty in a Comparative Perspective REC-WP 12/2010 Working Papers on the Reconciliation of Work and Welfare in Europe RECWOWE Publication, Dissemination and Dialogue Centre, Edinburgh © 2010 by the author(s) The Working Papers on the Reconciliation of Work and Welfare in Europe series seeks to promote the diffusion of research and research integration activities taking place within the network and being produced by other researchers working on issues of work and welfare in Europe. Working papers are published either within the framework of a series of closed calls, which follow the different stages in the life-cycle of the network’s activities, or as part of an open call, which aims to privilege both research focussed on cross-national comparative analysis of the various tensions between work and welfare and research focussed on the role of the European level in addressing these tensions. All papers are peer-reviewed. The Working Papers on the Reconciliation of Work and Welfare in Europe are published online by the Publication, Dissemination and Dialogue Centre (PUDIAC) of RECWOWE. They can be downloaded at http://www.socialpolicy.ed.ac.uk/recwowepudiac/working_papers/ RECWOWE / PUDIAC on the internet: http://www.socialpolicy.ed.ac.uk/recwowepudiac About the authors Eric Crettaz is lecturer at the University of Neuchâtel, Switzerland. He received his PhD at the Swiss graduate school of public administration for a study of policies that alleviate working poverty without creating hurdles in the labour market in Europe and North America. For several years, next to his academic activities, he also worked for the Swiss federal administration and published numerous reports on working poverty and social assistance recipients in Switzerland. Giuliano Bonoli is Professor of social policy at the Swiss graduate school of public administration (IDHEAP), in Lausanne, Switzerland. He received his PhD at the University of Kent at Canterbury for a study in pension reform in Europe. He has been involved in several national and international research projects. His work has focused on pension reform, labour market and family policies, with particular attention paid to the policies of welfare state transformation. He has published some forty articles and chapters in edited books, as well as several books. Abstract The objective of this article is to distinguish between different types of working poverty, on the basis of the mechanisms that produce it. Whereas the poverty literature identifies a myriad of risk factors and of categories of disadvantaged workers, we focus on three immediate causes of in-work poverty, namely low remuneration rate, weak labor force attachment, and high needs, the latter mainly due to the presence of children (and sometimes to the increase in needs caused by a family breakup). These three mechanisms are the channels through which macroeconomic, demographic and policy factors have a direct bearing on working households. The main assumption tested here is that welfare regimes strongly influence the relative weight of these three mechanisms in producing working poverty. Our figures confirm this hypothesis and show that low-wage employment is a key factor but, by far, not the only one, and that family policies broadly understood play a decisive role, as well as patterns of labour market participation and integration. Keywords Working poverty, welfare regimes, welfare state, poverty mechanisms 6 Working Papers on the Reconciliation of Work and Welfare in Europe Introduction The notion of the working poor is frequently used in public debates, but it refers to a great variety of different profiles, who experience very different situations. To classify them in the same category may obscure some important aspects of the problem, something which could prove detrimental to social policy efforts. The situation of, say, a single mother with an average educational level who works part- time and that of a couple of low-skilled, low-wage working parents who work full- time all year round require different policies to provide the necessary support. The existing definitional ‘chaos’ could become particularly problematic should the problem of working poverty expand in the near future. One way to move forward is to be more precise at the conceptual level, by ‘deconstructing’ the notion of working poverty. In order to do so, it is of paramount importance to understand the main mechanisms that cause workers in post-industrial economies to get a low income. More often than not, the ‘working poor’ are perceived as synonymous to ‘low-wage workers’. In fact, empirical evidence demonstrates that, in most OECD countries, being a low-wage worker does not necessarily lead to poverty, thanks to other income sources, most notably other household members’ earnings and social transfers (Marx and Verbist (1998), Strengmann-Kuhn (2003), Andress and Lohmann (2008), Peña-Casas and Latta (2004), Swiss Federal Statistical Office (2008)). In addition, many working poor are self-employed; indeed, self-employed workers can have low and volatile earnings - this is particularly true for the self-employed without employees. However, a low remuneration rate or a low wage can, obviously, be a poverty factor if no other adult lives in the household or if other adult household members do not work. In this article we attempt to deal with the conceptual complications involved in discussions on the working poor. Others have contributed to clarify our understanding of this notion by looking at the composition of the working poor population (Lohmann and Marx (2008)). Here we take a different approach, and focus on mechanisms leading to working poverty. Based on the existing literature, we identify three such mechanisms: low earnings, low labour force attachment, and large family size. By looking at the mechanisms that produce working poverty, we show that this social problem can take different shapes in different contexts. We look at cross-national variations in working poverty through the lens of the welfare regime approach, and expect working poverty to be of a different kind in different regimes. Empirically, we use Luxembourg Income Study data in order to show that the main sources of working poverty differ across the countries selected to represent the different welfare regimes. Our analysis allows us also to highlight the impact of some social policy programmes, such as family benefits, that clearly impact on the profile of the working poor population. The article begins by highlighting some of the key problems involved in the definition of the category of the working poor and by looking at definitions that are Crettaz, Bonoli: Why are some workers poor? 7 found in the specialist literature. It then moves on to discuss on a more theoretical level the mechanisms that may lead to working poverty. Third, we present our hypotheses concerning the mechanisms that we expect to prevail in different welfare regimes. These are tested empirically in the final part of the article. Defining working poverty A conceptual discussion of the notion of the working poor has to deal with two definitional issues. One of them concerns the well-known problem in defining who is poor, which has kept busy social scientists for several decades, without reaching a definitive conclusion. Even more problematic is the definition of ‘working’: is one month of employment in the previous year or one hour of work per week sufficient to be classified as ‘being in work’, or should the definition be more restrictive? Who is poor? Defining poverty by setting a low-income threshold is a challenging task: some indicators have become quite widespread in mainstream research; however, they range from approximately 40 per cent to 60 per cent of median equivalised disposable income. In fact, the contentious issue of poverty measurement goes far beyond the level of the poverty line. Many heated debates are ongoing in this field. The main lines of conflict concern the nature of the phenomenon – does poverty equate to low income or is a multidimensional indicator (of deprivation) more appropriate? – and the reference level -is it better to define a minimum level held constant (e.g. the cost of a basket of goods and services deflated with the consumer price index) or a relative level directly linked to the living standards or the income of the ‘average citizen’? (Townsend (1974), Sen (1983), Atkinson (1989), Glennerster et al. (2004), Leu et al. (1997)). The issue of whether to assess poverty in absolute terms - usually deriving a poverty line from a basket of goods and services, kept constant in real terms - or in relative terms - usually a share of median equivalised disposable income - is indeed complex, as both approaches display strengths and weaknesses. But in fact we do not want to further discuss the issue of setting a poverty line, because it is a topic that has already been dealt with in numerous studies. Who is working? More problematic is the practice of arbitrarily setting a number of hours a week, or months a year, spent in the labour market to determine who is ‘working’ and who is not. Is a person a ‘working’ poor if he or she only works one hour here and there? But why, on the other hand, should a person who works part-time, or who only spent a few months in the labour market (during the year prior to the interview), not count as a poor worker? Indeed, all definitions of working poverty entail an arbitrary component.

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